McRibs and McMansions

I love McDonald’s Big Macs… and don’t get me started on the fries. I can almost taste them now!

With that being said, I can’t remember the last time I ordered either one of those things. In fact, the only time I go to McDonald’s is to grab a quick drink (for $1, who can beat that?) or for breakfast when we’re traveling.

As I get older, the taste of McDonald’s food has not gotten worse, but it now wreaks havoc on my waistline and makes me feel ill for hours after eating it.

Talking about McDonald’s like this makes it sound like a restaurant, which is how it started and how it advertises itself to this day. But if you look at the operations of the business, it is something else entirely.

As one person put it, McDonald’s is really a large commodities firm that sells to the end consumer… and what a big buyer of commodities it is! The Super-Size retailer buys more than one billion pounds of beef each year, and more than three billion pounds of potatoes, which gives McDonald’s the ability to influence these markets in a meaningful way.

However, these are consistent markets for McDonald’s, meaning they buy these commodities every year. In other markets, McDonald’s comes and goes, dramatically affecting prices, production, and supply. A great example of this is the McRib…

McDonald’s introduced that weird slab of sauce-covered pork in the early 1980s because the McNugget was so wildly popular. As the company ran out of chickens, it needed something else to satisfy demand. Enter the McRib.

The pseudo-pork sandwich (that includes bits of heart, tripe, and stomach, to help it keep its shape) was not a great seller, but it developed enough of a following to be a re-occurring offering for the chain.

This means that McRibs – and therefore McDonald’s demand for pork – comes and goes. As you might imagine, the pork market reacts accordingly every time McDonald’s puts the McRib back on the menu.

This isn’t to say that pork doesn’t have a market beyond McDonald’s. It obviously does, but the entry and exit of such a large player is big factor… which is why the recent stories about the housing market remind me of the McRib.

Housing has a cycle based on demographics, which cheap credit and the overall health of the economy can accentuate. In addition, the entrance – and exit – of large players can affect the housing market.

This is the concern today…

Just like pork buyers and sellers who witness McDonald’s driving their market, those in real estate are watching large hedge funds and other institutions push around home prices and supply.

For the last several years, multi-billion dollar firms have been buying up single family homes with the intention of renting them for a while and then disposing of them through sale or securitization (bundling them up and selling them to other investors).

Because this was happening at the bottom of the housing market cycle, the entry of such large players lifted prices and shrank supply more than it probably would have in normal times.

Anyone who was buying alongside these investors has benefited from the notion of a rising tide lifting all boats.

Anyone who was interested in buying but has not yet pulled the trigger probably feels left behind about now because of how far prices have risen in the past eighteen months. But an interesting thing is happening on the way to the closing table. Some big investors are backing away.

Blackrock, the biggest and best known firm involved in this business, has purchased over 26,000 homes and still appears to be going strong. Others, such as Och-Ziff and Carrington, have ended their purchases for now, in September 2012 and April 2013 respectively. The reasons they gave centered on the rising home prices and how that affects their long run profitability.

Which brings up what this means for everyone else…

If several of the large institutions that were buying single family homes, at what they believed to be cheap prices, have slowed or stopped their purchasing, what does that mean for prices going forward?

Yes, there will still be home buyers, but just like McDonald’s in the pork market, a major player (or several major players) will be absent. Without a substantial increase in purchasing from other sources, this development should, at the least, be a note of caution to other real estate buyers, if not an all-out warning sign.

The last thing you want to be in the real estate market right now is either a seller holding out for a higher price or a buyer that just got into the market right before the big guys left. That could leave you with a queasy stomach and a little sauce on your face.

We see warning signs all around in the housing market, and continue to warn investors who have recently become landlords that trouble is possibly ahead.


Rodney

 

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Categories: Housing Market

About Author

Rodney Johnson works closely with Harry Dent to study how people spend their money as they go through predictable stages of life, how that spending drives our economy and how you can use this information to invest successfully in any market. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. He’s a regular guest on several radio programs such as America’s Wealth Management, Savvy Investor Radio, and has been featured on CNBC, Fox News and Fox Business’s “America’s Nightly Scorecard, where he discusses economic trends ranging from the price of oil to the direction of the U.S. economy. He holds degrees from Georgetown University and Southern Methodist University.